Friday, February 15, 2013

Please to calm down about the minimum wage

As we all know, President O has called for raising the Federal minimum wage to $9.00 an hour. This has caused many of my friends to get fairly upset and argue that this is a bad policy that will raise unemployment.

But....

(1) In truth, we don't really know what the minimum wage does to unemployment. Studies are mixed at best on that issue. It's just not that easy to isolate causal effects here.

(2) We just don't live in a principles of micro world where markets are perfectly competitive and firms have no market power / economic profits, so any wage above an individual's marginal product is impossible to sustain.  Besides the difficulty of identification, this is probably the main reason why it's so hard to find employment effects of minimum wage changes.

(3) A better reason to object to the minimum wage increase is that there are much more efficient ways to help the working poor. It doesn't seem to be well appreciated, but a substantial fraction of workers earning the minimum wage do NOT live in poor households. They are teenagers living at home or second workers in a household. If we wish to aid the working poor, increasing the earned income tax credit (EITC) is a much more effective approach.

(4) It is also good to remember that there are still a lot of jobs out there where the minimum wage does not apply (some classes of young worker, workers who earn tips).

(5)  This is a bit of a stretch but if the higher minimum wage did price someone out of the labor market, perhaps it would propel them into upgrading their human capital, with a GED or some vocational training or community college.

Finally, I'd like to ask my conservative friends to stop making the "if a higher minimum wage is good why stop at $9, why not make it $90 and everyone would be rich" argument.

It's just silly.

Obviously, we could find a minimum wage that would have serious employment effects. But it's not in the $9.00 neighborhood, and no one is proposing even a doubling of the current minimum wage.

If Reid & Pelosi (in 2014 after the Dems take back the House) propose a $20 minimum wage, then I'll join y'all on the ramparts.

Otherwise, let's consider giving it a rest. There are far far far worse policies that are actually in effect which deserve our attention and effort.





40 comments:

Bharat said...

"(1) In truth, we don't really know what the minimum wage does to unemployment. Studies are mixed at best on that issue. It's just not that easy to isolate causal effects here."

"Obviously, we could find a minimum wage that would have serious employment effects."

Can you explain how this isn't contradictory? If we can find a minimum wage that has serious employment effects, why wouldn't a minimum wage that has smaller employment effects exist on a smaller level?

"(2) We just don't live in a principles of micro world where markets are perfectly competitive and firms have no market power / economic profits, so any wage above an individual's marginal product is impossible to sustain."

Do you mean that any wage above an individual's MP is impossible to sustain in perfectly competitive markets or in the real world?

And in the real world, employers try to earn profits. They will not hire someone for less than what they believe to be that individual's contribution. An increase in the minimum wage, small OR big increases the bar to be jumped over. This is proper knowledge. We can speculate that a higher minimum wage might incentivize individuals to pursue education, but this is pure speculation. Even if it was true, the opportunity cost of having a lower wage job and increasing skills in that manner have to be taken into account.

Max said...

Well, you forget one effect, that is actually even detected by Obama s house economist on minimum wage. Employment keeps constant, while price of Labour rises. This means that companys will raise prices in response. This is done more often than firing people. Also jobless recoveries and increasing productivity will be more probable

Anonymous said...

So if increasing the minimum wage does not mean jobs will be destroyed and unemployment will go up, then does the contrapositive hold true that if you lowered or eliminated the minimum wage that jobs would not be created and unemployment wouldn't decrease?

Liberals complain non-stop about job shipped overseas since 40% of the world lives on less than $2/day. Those jobs went overseas because they are illegal to create here and pay a wage that makes economical sense.

You're also completely ignoring opportunity cost. Saying that someone prices out of the labor market should increase their human capital is ignoring the fact that every successful entrepreneur--Bill Gates included--worked for less than minimum wage at some point in their lives. Consider you're a poor black 18 year old. You have two choices--go to work earning a guaranteed $9/hour minimum wage or go to school earning a negative wage and incurring student loan debt. Even if you went to school full time and worked full time, you're earning less than minimum wage. If you just go to school you're losing money hand over fist. Considering psychology tells us that it is human nature to exert more effort to avoid paint than pursue pleasure, what do you think will happen? The poor black 18 year old will go earn $9/hour and skip school, perpetuating the cycle of poverty.

Additionally, if a restaurant owner wants to pay a homeless bum $2/hour to take the trash out at the end of the night, he is breaking the law. The most disadvantaged and downtrodden poor are permanently priced out of the job market. Sure there is welfare, but welfare is designed to be a "safety net" and not a lifestyle.

I'm an upper-class white male that earns six figures and doesn't worry about prices. I'm not against minimum wage increases because it hurts me, but because it hurts the people at the bottom of the food chain. I also forgot to mention American Samoa--minimum wage devastated their economy in the past 5 years and they now have record unemployment.

Pat said...

It's hard to isolate causal effects of everything in macroeconomics but that's no reason to doubt the logic that price floors create a surplus of supply of labor.

$90 vs $9 just illustrates the point. I think it's on you to show that the demand curve for labor is not downward sloping at the minimum wage.

Anonymous said...

Aren't a lot of union contracts tied to minimum wage such that when minimum wage increases, union wage rates also increase?

Norman said...

What on earth, people? He's talking about introductory microeconomics here.

In competitive labor markets, price floors always create excess supply, and how much depends on price elasticities of supply and demand.

If employers of low-skilled labor have market power, the market starts to resemble a monopsony market (link), so that the market restricts employment in order to lower wages.

In that context, there is a range in a which a price floor actually increases employment and reduces deadweight loss: below the monopsony price, it has no effect; between this wage and the wage where MC=MRP, the price floor actually makes the market act more competitive; and above MC=MRP, the price floor makes the distortion even worse than the market power did.

So there's no contradiction in saying we have no robust evidence whether marginal changes in the minimum wage make labor markets more or less competitive, and yet everyone agrees that a large enough minimum wage would make things worse.

Arguing for the conservative or even libertarian position based on bad economics, bad empirics, or 3911bad logic isn't any better than arguing for the liberal position based on the same errors.

Aaron McNay said...

I think for the minimum wage, we need to keep in mind that the standard supply and demand model basically assumes that we hold everything else constant, while only changing prices. Of course a change in the minimum wage results in changes other than the price of labor. Employers can change other types of compensation, they can ride their workers harder (which pushes up the worker productivity, but only to a point).
As for the $9 relative to $90 minimum wage issue, I think comparing the two does provide an important point that proponents of the minimum wage need to address. I think just about everyone would agree that a $90 minimum wage would reduce employment. Based on that, I think proponents of increasing the minimum wage should provide some explanation, and evidence, for why the increase to $9 would not result in an employment decrease, one that we would all agree would occur if the increase was to $90, or that the resulting decrease in employment is offset by corresponding benefits. However, I do not think that I have ever heard many policy makers even address this issue, let alone provide any evidence that the benefits of the minimum wage increase exceed the costs.

Unknown said...

Econ 101 tells us that raising the price of something lowers demand. Labor is no exception. Companies that depend on minimum wage employees will look for ways to cut their labor force or go to automation.

Low skilled workers who cannot generate enough productivity sufficient to justify $9 per hour will be left out in the cold. Employment is voluntary, it is not for government to dictate the terms of these voluntary arrangements.

If some poor minority kid who is a dropout with a minor criminal record can get hired at $5 per hour that would be fantastic. He gets to start climbing the economic ladder. Increasing the minimum wage to 9 bucks makes that bottom rung too high.

Gene Callahan said...

@Unknown: "Econ 101 tells us that raising the price of something lowers demand. Labor is no exception."

In a perfectly competitive market. I just love people who don't know econ 101 lecturing about econ 101.

"Can you explain how this isn't contradictory? If we can find a minimum wage that has serious employment effects, why wouldn't a minimum wage that has smaller employment effects exist on a smaller level?"

Right Bharat. If some amount of water is poisonous, then isn't any amount at all bad for you?

Gene Callahan said...

I post on this.

Gene Callahan said...

@Bharat: "And in the real world, employers try to earn profits. They will not hire someone for less than what they believe to be that individual's contribution.

Wow! BECAUSE they try to earn profits, employers will higher someone for AS MUCH below their contribution as they think they can!

kebko said...

I'd love for someone to show me a single employer who wouldn't spit his milk out his nose at the thought that minimum wages can be beneficial because he's a monopsonist. The idea that the entire low wage labor market is ruled by monopsony is ludicrous.

Bharat said...

Dr. Callahan:
"Wow! BECAUSE they try to earn profits, employers will higher someone for AS MUCH below their contribution as they think they can!"

I know you think you're pointing out something new to me, but I completely agree with this.

"Right Bharat. If some amount of water is poisonous, then isn't any amount at all bad for you?"

This is an interesting point, but I think it'd be up to the advocate of the minimum wage to explain why the economy and the minimum wage are analogous to the human body and water.

In addition, it's logic that shows why the minimum wage increases or has no effect on unemployment in any situation. Those in opposition to the minimum wage only point out the absurd situation to get others to admit the logic is correct. Therefore, it applies to lesser situations as well. If the logic is valid, the only situation in which the minimum wage would not raise unemployment (and would actually have no effect on it) is if every single individual who was under the new minimum wage happened to have a productivity that was higher than the new minimum wage. It'd be absurd to assume this, with the enormous range and variety of working individuals in our society.

There is no biological logic that says any amount of water is bad for you. But there certainly is economic logic that shows any increase in the minimum wage has an adverse effect (or at best, no effect) on unemployment. The situations are not analogous.

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Bharat said...

Whoops, made a mistake. The correct version of the analogy should be the minimum wage and unemployment to water and the human body.

(Having the word 'economy' instead of the word 'unemployment' is a different argument.)

Anonymous said...

"BECAUSE they try to earn profits, employers will higher someone for AS MUCH below their contribution as they think they can!"

If I hire a worker at $5/hour and they produce $10/hour for a $5/hour profit, my competitors would be foolish to not recruit the worker away at $6/hour for a $4/hour profit, or have you forgotten how a free market works?

The bottom line is workers are not indentured servants. The law says two people cannot enter into a contract because they are homosexuals (gay marriage), which is wrong. To say that two people cannot enter into a contract for labor in exchange for wages at whatever price they agree to is also wrong.

Norman said...

"The idea that the entire low wage labor market is ruled by monopsony is ludicrous."

I agree that it seems unlikely, but is it more unlikely than the idea that the entire low wage labor market is ruled by *zero* market power on either side? That's a pretty intensely restrictive assumption based on internal logic and zero evidence.

And a slight degree of monopsony power could be an explanation for why we can't get consistently measurable effects from small changes in the minimum wage. Of course that could also happen in a competitive market if firms have almost zero price elasticity, but in that case the economic costs of small changes in the minimum wage are also almost zero.

Either way, it still stands that this should be very far from a priority issue.

Tom said...

"...there are still a lot of jobs out there where the minimum wage does not apply." Given your ambivalence about the cruelty of the minimum wage, I'm surprised you consider this a good thing. Not meant to negate all your other points, Angus?

There's two guys, who negotiate, then agree to a deal. Is the deal to the advantage of both? Well, no force or threats were part of the talk, so Yes, THEY think so. Along comes a third party with a gun; this guy issues credible threats and changes the deal, the better to HIS liking. Good thing? Angus may wonder, but I'm sure: the third party's interference is a net negative. The fact that economists cannot prove this is an indictment of economics, not a sop to minimum wages laws or the many other trade and price controls.

Gene Callahan said...

"In a perfectly competitive market. I just love people who don't know econ 101 lecturing about econ 101."

Mis-stated. Of course, first of all, it is not *demand* that is lowered, it is quantity demanded. But a price floor can increase the quantity exchanged if the current price is below equilibrium.

Gene Callahan said...

"If I hire a worker at $5/hour and they produce $10/hour for a $5/hour profit, my competitors would be foolish to not recruit the worker away at $6/hour for a $4/hour profit, or have you forgotten how a free market works?"

I just LOVE guys who, whenever you point out a current problem, tell you loudly, "That's because we don't have a perfectly free market, jerk!"

But when you point out something that might correct some imbalance, they respond "Don't you even realize how a perfectly free market works, jerk?"

Anonymous said...

Gene--the labor market is a free market when your talking about the up side of prices because there ISN'T a price ceiling, but it is not free on the down side because there IS a price floor. Paying infinity is legal, but paying zero is not. The only reason an employer would not recruit away my $5/hour employee and pay him $6/hour is if there were a surplus of labor and they could pay someone else $5/hour instead of stealing away my employee with a higher wage.

How will minimum wage "correct" an imbalance? Better yet, what is the imbalance exactly? That companies are making a profit off of workers? That people are freely engaging in an exchange of labor for wages that someone else takes issue with? What exactly are we trying to fix that is broken here? If raising minimum wage to $9/hour "fixes" things, at what point do we cross the line and start breaking things again?

If we really want to help low wage workers, why not just make a new tax bracket of $0 to $20,000 and make the tax rate 0%? The government is taking taxes from them as an interest free loan and giving them a refund the following year as it stands today (most pay 0% at the end of the year). This not only would put more money in a workers' pocket, but also reduce labor costs as employers pay half the taxes, inflating minimum wage beyond the published rate.

Urstoff said...

So basically, there are a lot of possibilities for which we have little evidence. Therefore, proponents of raising it as a means to help the poor are either ignorant, signalling, or both. I'm going to guess both.

Gene Callahan said...

So basically, in an unclear situation, anyone who disagrees with Urstoff is either ignorant or signaling, or probably both.

Hmm, I'm going to say Urstoff is either arrogant, or "un stronzo," or both. I'm going to guess both.

Urstoff said...

Not really much of a retort, since it seems to be agreed that we don't really have any strong data on the effects of the minimum wage, possibly because it's low enough that the effects aren't that large.

Or are you really arguing that proponents of raising the minimum wage are arguing from a strong empirical grounding?

Gene Callahan said...

No sir. My post was not about proponents of the minimum wage. It was about *you* and your ill manners.

Urstoff said...

It's ill manners to point out that because those who publicly promote minimum wage hikes cannot being doing so from an empirically grounded standpoint, they must be ignorant (that is, think they are justified) or signalling or both? Ok...

Gene Callahan said...

The data is ambiguous. Therefore, intelligent, well-intentioned people could read it in different ways. Therefore, to conclude that anyone who happens to read it differently than *you* is ignorant or "signaling" (and what an example of "signaling" using word that is: "Look at me! I'm hip to the trendiest economics terms!") certainly is ill-mannered.

Pelsmin said...

All you pointy-headed academics don't know how the real world works. And all you knuckle-dragging ditch diggers don't know the first thing about economic theory. So there.
As I understand it, economic facts like the laws of supply and demand are assumed to apply in the real world ON AVERAGE and in the LONG RUN. Not everywhere all the time. So if you take something with as many varied buyers as labor and as many suppliers (300 million?) you can rule out monopoly, monopsony and other distorting market power. It's virtually certain that forcibly raising the price will cut quantity demanded and raise quantity supplied, thus worsening unemployment. And not just at the bottom; the supervisors making $9/hr today will need a raise. The shift managers making g $11/ hr will too, up the chain some ways.

Urstoff said...

I'm not "reading" it at all. I'm saying that anyone who purports to be justified in holding that policy X regarding the minimum wage (either increasing or decreasing it; in this case, we just happen to be talking about increasing it) is not in fact justified (because the data is lacking or could be "read" either way). Therefore, either the person is justified mistakenly (and thus ignorant in the strictest sense of the term) or signalling (which is compatible with someone who knows they aren't justified or simply don't care that they aren't justified). Pointing this out certainly isn't ill mannered.

Anonymous said...

Intended for Angus and Gene: The evidence really isn't "mixed" or "ambiguous" anymore.

Norman said...

@Anonymous 1:44 AM:

Cites please?

Damian said...

I think this discussion ignores the bigger picture. Rather than discussing 7.25 vs 9, we should be discussing nothing vs 7.25 or 9.
For example:
At a community supported kitchen in Berkeley, CA, the owners used to allow volunteers to work in exchange for $1/hour in house currency. Seems like a bad deal to an outsider, but they had takers (mainly moms I think). Now? Their labor lawyer told them they might be liable for back wages, and the volunteer program is gone. GONE. The owner was also familiar of other examples, including Hmong farmers that used family members as workers, and the labor folks cracked down on them for not paying enough (and the cracking down came without any specific complaint from a competitor, which was surprising to me considering the bureaucratic incentives involved - that made me worried).

In addition, the kitchen also used to have an apprentice program for youth with similar terms as the volunteer program (no tuition, $1/hour, cooking classes to learn the craft). Now, they had to completely restructure this program and actually CHARGE youth a couple grand for a couple month program. Who does that hurt?

There may be more important idiotic polices out there, but this one deserves attention and repeal.

Anonymous said...

Wow! This is easily the worst post I've ever read on KPC.

Anonymous said...

Unpaid college internships should also be illegal, right?

Seth said...

I guess you're right. Increasing the minimum wage doesn't cede that much liberty, after all. Let them take it.

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